As I said in my previous post on LLCs, the limited liability company (LLC) has become the entity of choice for the majority of new business owners. In Iowa, there are approximately twice as many filings for LLCs each year than there are for corporations. But I still have a special place in my heart for the good ‘ole corporation and I still counsel many business owners that a corporation is the right entity for them. In particular, many small business owners file what is known as the S Corporation. The S corporation is attractive to many small business owners because it is a "pass-through" entity where all the profits of the corporation flow through to the owners, enabling them to avoid the possible "double taxation" issues of C corporations. The owners may also be able to save on self-employment taxes with the S corporation but must be careful to set a "reasonable salary" to avoid issues with the IRS.
The owners of corporations are called shareholders or stockholders and ownership is evidenced by share or stock certificates. Like LLCs, the filing and ongoing fees for corporations in Iowa are reasonable compared to many other states. Here is an outline of the steps you need to follow in order to form a corporation in Iowa:
1. Find out the availability of your proposed business /corporation name. You can do a quick search on the Iowa Secretary of State Web site to see whether your name is available. If you enter the name of your proposed business and it doesn’t appear, chances are very likely you’ll be able to register that name in Iowa. If the name is available you may want to reserve the name through the Secretary of State but you are not required to do so before forming your business entity. You should consider whether any company outside Iowa has your business name. You can conduct a free search on the U.S Patent and Trademark Web site or use a paid service to research trademarks nationwide. It is also a good idea to check whether someone has your proposed Internet domain name. An Iowa intellectual property attorney could also be very helpful in this process.
2. Pick a Place to Form Your Corporation. I am sometimes asked whether an Iowa company should form a corporation in another state such as Delaware or Nevada. In general, an Iowa small business is probably better off incorporating or forming an LLC here in Iowa. The filing fees are low ($50.00) and the ongoing fees for registering the business in Iowa are among the lowest in the country. (Only $30.00 every two years if you file your biennial report online).
3. Choose the Shareholders. If you are forming a corporation who will be the shareholders in the corporation? These are the owners of the corporation. Determine how much capital you will need. Do you have enough capital or access to capital in order to start the business on your own? If not you may need to consider other investors.
In many cases the shareholders of the business are also the directors. You may consider whether you want or need outside directors? There may be good reasons to have outside directors but think this over carefully before you elect to do so. Electing to have outside directors may limit your control over the business.
3. Create your Articles of Incorporation. The articles of incorporation act as a charter to start your new business in Iowa. The filing fee with the Secretary of State is currently $50.00. It is generally a good idea to have an Iowa business lawyer prepare your articles of incorporation and associated company documents. Online document filing companies cannot provide you with legal advice.
4. Prepare your Corporate Bylaws. The bylaws of the corporation set out the operating standards and procedures the busines will follow.
5.Create meeting minutes, resolutions and agreements. It is a good idea to document the initial meeting minutes of the corporation including the meeting of the shareholders and directors. At this time, you will elect the officers of the corporation including the president, vice-president, secretary and treasurer. You may also issue share or stock certificates at this stage. If you have multiple shareholders you will also likely need a buy-sell agreement.
6. Obtain your employer identification number (EIN). Your corporation will need to obtain an employer identification number from the IRS. This can be done through a convenient online application process.
7. Elect your tax status. There are different options for how your corporation could be taxed. Make sure to talk with both your accountant and lawyer about which form of business entity is the most advantageous for your situation.
8. Open a bank account. You will typically need the EIN and a banking resolution in order to do this.
9. Obtain any licenses and permits. You will need to check the federal, state and local regulations to determine whether you need and licenses or permits to operate your business.
10. Follow the corporate formalities of running a business. In Iowa, this includes registering your corporation by filing a biennial report every two years with the Secretary of State’s office. You may also draft corporate minutes at least on an annual basis in order to elect your officers and directors. It’s best to sign all documentation using your title as a corporate officer so that others will know you are operating with a corporation rather than as a sole proprietorship.
For more information on forming an Iowa corporation, please click the following link for my Small Business Formation Package.